New Delhi: Moody’s Investors Service has downgraded the corporate family rating and senior secured ratings of Delhi International Airport Pvt. Ltd’s (DIAL) to Ba2 from Ba1.

The ratings outlook is stable, the rating agency said in a statement on Monday.

“The downgrade reflects continued concerns about the level of cash flow generation following the regulator’s previous tariff order, which will see regulated revenues reduced materially over the 2015-2019 regulatory period to levels that were not incorporated in our previous expectation", said Abhishek Tyagi, a Moody’s vice- president and senior analyst in the statement.

The ratings agency also takes into account DIAL’s new expansion programme that is planned over the next 3-5 years, which is set to mount further pressure on the financial metrics, he added.

The tariff order which the regulator—Airports Economic Regulatory Authority (AERA) —announced in December 2015, will apply to DIAL over the 2016-2019 period, and will lead to ‘a substantial decrease in annual aeronautical revenue by around Rs20 billion (Rs2,000 crore) or around 70% from 2018 fiscal year", said Tyagi. “This will also alter the revenue mix, with the proportion of the higher risk non-aeronautical revenues increasing to a higher level than previously anticipated," he added.

In June 2015, the ministry of civil aviation directed the Airport Economic Regulatory Authority (AERA) under section 42(2) of the AERA Act, 2008 to adopt a hybrid till with 30% cross-subsidization for tariff determination.

Airports earn non-aeronautical revenues such as rentals from retail outlets and airport parking charges, besides aeronautical revenues from flight operations.

In the single till model, all airport activities—aeronautical and non-aeronautical—are taken into account to determine airport charges. So airlines and passengers are charged less. This model, currently followed at the Hyderabad airport, is also followed in UK airports such as Heathrow and Gatwick.

In contrast, only aeronautical activities are considered under the dual till model, which private airport operators prefer since it will fetch them higher revenue. Under the hybrid model, 70% of non-aeronautical revenues are also taken into account. This is the tariff model proposed for the upcoming Navi Mumbai airport. The privatized airports in Delhi and Mumbai also operate under the hybrid till model.

“We also see ongoing uncertainty regarding future regulatory decisions, thereby raising the business risk for DIAL to a level that was not incorporated in the previous rating, Tyagi says, adding “Prior to today’s rating action, the previous rating was on negative outlook reflecting these concerns".

The tribunal authority—The Airports Economic Regulatory Authority Appellate Tribunal (AERAAT)—is currently reviewing the previous tariff order (covering the period 2010 to 2014). The impact of the order pertaining to 2015-2019 will only likely be known when the tribunal completes the review of the previous tariff order.

Over the next 4-5 years, DIAL plans to implement an expansion programme (Project 3A), which includes airfield enhancements, expansion of terminals, construction of new runway and other utilities.

Project 3A, the expansion project is likely to require capital expenditure in the range of 4,000- 7,000 crore over next 3-5 years, depending on the project final size and composition, said Moody’s in the statement. While the expansion project is indicative of passenger growth being experienced by DIAL, the rating downgrade takes into account the incremental amount of debt to part-fund the project as well as the construction and execution risk associated with it.

DIAL’s leverage as reflected by funds from operations (FFO)/Debt will likely decline to mid-single digit, a level that is incorporated in the Ba2 rating, it said.

DIAL’s current liquidity position profile is adequate, with the free cash on hand of 1,790 crore as of 30 June 2016 and a debt servicing and capex requirement totaling around 280 crore over next 12 months. The stable outlook reflects DIAL’s adequate liquidity, and Moody’s view that the company’s financial profile over the next 12-18 months is manageable at the Ba2 rating level.

Moody’s warned that given the high capex in the expansion programme and the uncertainty with the regulatory process, an upward rating movement in the near term is unlikely.

Over time, ratings can be upgraded if DIAL demonstrates an ability to maintain robust financial metrics, including funds from operations/gross adjusted debt above 10% and debt service coverage ratio exceeding 1.5x on a consistent basis.

It said, the ratings could be downgraded if there is deterioration in financial leverage which could be due to higher expansion program, or missteps in implementing the planned project 3A, or a reduction in aeronautical and/or non-aeronautical revenues relative to our base case expectation. Financial metrics that could indicate a weakness in leverage include funds from operations or debt declining below 3-4% on a consistent basis.

Moody’s has used its Joint Default Analysis approach for Government Related Issuers in assessing DIAL’s rating, because the company is more than 20% government-owned through the Airports Authority of India (AAI), a government agency.

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